Economics II
Chapter Exam Questions
Course Introduction
Economics II builds upon foundational economic principles to explore more advanced topics in both microeconomics and macroeconomics. Students will examine market structures, factor markets, and the role of government in the economy, as well as issues like inflation, unemployment, and economic growth. The course also introduces international trade, exchange rates, and the evaluation of fiscal and monetary policies. Analytical techniques and real-world case studies are used throughout to deepen understanding of economic behavior and decision-making in complex environments.
Recommended Textbook Macroeconomics 9th Edition by Andrew B. Abel
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Page 2
Chapter 1: Introduction to Macroeconomics
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Q1) The two major reasons for the tremendous growth in output in the U.S.economy over the last 125 years are
A)population growth and low inflation.
B)population growth and increased productivity.
C)low unemployment and low inflation.
D)low inflation and low trade deficits.
Answer: B
Q2) Testing a theory by comparing the theory's implications with data obtained in the real world is called
A)empirical analysis.
B)descriptive calibration.
C)historical variance analysis.
D)univariate analysis.
Answer: A
Q3) Before World War II,the average level of prices in the United States usually
A)fell during wartime and rose during peacetime.
B)fell during wartime and fell during peacetime.
C)rose during wartime and fell during peacetime.
D)rose during wartime and rose during peacetime.
Answer: C
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Chapter 2: The Measurement and Structure of the National Economy
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Q1) Intermediate goods are
A)capital goods, which are used up in the production of other goods but were produced in earlier periods.
B)final goods that remain in inventories.
C)goods that are used up in the production of other goods in the same period that they were produced.
D)either capital goods or inventories.
Answer: C
Q2) The consumer price index (CPI)was 180 for 2009 when using 1995 as the base year (1995 = 100).Now suppose we switch and use 2009 as the base year (2009 = 100).What is the CPI for 1995 with the new base year?
A)18.0
B)55.6
C)80.0
D)111.2
Answer: B
Q3) How are net exports,net factor payments from abroad,and the current account balance related?
Answer: NX + NFP = CA.
4
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Chapter 3: Productivity, output, and Employment
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Q1) The fact that the production function relating output to labor becomes flatter as we move from left to right means that
A)the marginal product of labor is positive.
B)the marginal product of capital is positive.
C)there is diminishing marginal productivity of labor.
D)there is diminishing marginal productivity of capital.
Answer: C
Q2) The marginal product of labor (measured in units of output)of a firm is given by MPN = A(2000 - N)
where A measures productivity and N is the number of labor hours used in production.Suppose the price of output is $6 per unit and A = 0.002.
(a)What will be the demand for labor if the nominal wage is $18?
(b)What will be the demand for labor if the nominal wage rises to $21?
Answer: (a)The real wage = $18/$6 = 3.Setting the real wage equal to the marginal product of labor gives 3 = 0.002(2000 - N),so 0.002N = 1,so N = 500.
(b)The real wage = $21/$6 = 3.5.Setting the real wage equal to the marginal product of labor gives 3.5 = 0.002(2000 - N),so 0.002N = 0.5,so N = 250.
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Page 5
Chapter 4: Consumption, saving, and Investment
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Q1) How would each of the following affect Cheryl Shirker's current consumption and saving? Cheryl is a forward-looking consumer with no borrowing constraints.
(a)Cheryl's firm announces a reorganization plan,increasing Cheryl's future income dramatically.
(b)Cheryl's father,who had planned to leave her a large bequest,must spend all his wealth on medical bills after a prolonged illness.
(c)The real interest rate rises from its original level.Cheryl originally planned to have no assets for the future; that is,she planned to spend all her original assets and all her income when she was young,and planned to consume an amount equal to her future income when she was old.
Q2) Calculate the user cost of capital of a machine that costs $5000 and depreciates at a 25% rate,when the nominal interest rate is 5% and the expected inflation rate is 10%.
A)$5000
B)$1500
C)$1000
D)$100
Q3) What is the marginal propensity to consume,and why is it always less than one?
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Q1) Consider a small open economy that is in equilibrium with a current account surplus.
(a)Draw a diagram showing this situation.
(b)Now suppose that future income increases.Show what happens in your diagram.What happens to the world real interest rate and the equilibrium quantities of saving,investment,and the current account balance?
(c)Repeat parts (a)and (b)for the case of a large open economy,showing a situation in which the home country initially has a current account surplus.Draw a diagram and describe how the rise in future income in the home country affects all four variables (the world real interest rate and the equilibrium quantities of saving,investment,and the current account balance)in both countries.
Q2) If a freeze destroys much of the crop of an agricultural nation,then
A)the desired investment curve would shift to the left.
B)the desired investment curve would shift to the right.
C)net foreign lending would increase.
D)net foreign lending would decrease.
Q3) Suppose an economy has output of 2100,government spending of 40,consumption of 1600,and absorption of 1940.Calculate the equilibrium values of investment and net exports.
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Chapter 6: Long-Run Economic Growth
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Q1) Over the past year,output grew 4%,capital grew 2%,and labor grew 1%.If the elasticities of output with respect to capital and labor are 0.3 and 0.7,respectively,how much did productivity grow?
A)2)0%
B)2)7%
C)3)0%
D)3)3%
Q2) In the Solow model,if f(k)= 8k<sup>0.5</sup>,s = 0.2,n = 0.3,and d = 0.1,what is the value of k at equilibrium?
A)1
B)4
C)9
D)16
Q3) The Golden Rule capital-labor ratio is the level of the capital-labor ratio that,in the steady state,
A)maximizes output per worker.
B)maximizes investment per worker.
C)maximizes consumption per worker.
D)maximizes capital per worker.
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Page 8
Chapter 7: The Asset Market, money, and Prices
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Q1) If the nominal money supply grows 5%,real income falls 2%,and the income elasticity of money demand is 0.8,then the inflation rate is
A)3)0%.
B)3)4%.
C)6)6%.
D)7)0%.
Q2) Which of the following measures is the best measure of money as a medium of exchange?
A)M1
B)M2
C)M3
D)None of the above
Q3) Give five examples of factors that could reduce the demand for money.
Q4) If there is a financial panic and increased uncertainty about the returns in the stock market and bond market,what is the likely effect on money demand?
A)Money demand declines first, then rises when inflation increases.
B)Money demand rises.
C)The overall effect is ambiguous.
D)Money demand declines.
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Chapter 8: Business Cycles
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Sample Questions
Q1) Which of the following macroeconomic variables is the most seasonally procyclical?
A)Expenditure on services
B)The unemployment rate
C)Expenditure on durable goods
D)The real wage
Q2) The Great Recession began in ________ and ended in ________.
A)December 2007; June 2009
B)December 2007; December 2011
C)October 2008; June 2009
D)October 2008; December 2011
Q3) In the long run,an increase in government purchases of military equipment would cause output to ________ and the aggregate price level to ________.
A)stay constant; fall
B)fall; fall
C)fall; stay constant
D)stay constant; rise
Q4) How has the severity and duration of business cycles changed over time in the United States?
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Chapter 9: The Is-Lmad-As Model
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Q1) You have just read that Australia has suffered a drought,destroying its wheat crop for this year.The effect of this adverse supply shock on Australia would probably be
A)an increase in prices and an increase in real interest rates.
B)an increase in prices, an increase in nominal interest rates, but a decrease in real interest rates.
C)a decrease in prices and a decrease in real interest rates.
D)a decrease in prices, a decrease in nominal interest rates, but an increase in real interest rates.
Q2) A temporary decrease in government purchases causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) If the money supply is increased,which curve shifts in the IS-LM model? What direction does it shift? What is the intuition behind this shift?
Q4) Describe what happens to the FE line if government purchases increase.
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Chapter 10: Classical Business Cycle Analysis
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Q1) The short-run aggregate supply curve can slope upward because
A)prices are fixed in the short run.
B)wages adjust immediately to changing economic circumstances.
C)producers have misperceptions about the aggregate price level.
D)prices adjust instantaneously.
Q2) Assuming money neutrality in the classical model,a 10% increase in the nominal money supply would cause
A)a 10% increase in the real money supply.
B)a 10% decrease in the real money supply.
C)no change in the real money supply.
D)a less-than-10% change in the price level due to a shift in the aggregate supply curve.
Q3) People increase their labor supply in response to a temporary increase in government purchases because
A)current or future taxes will increase, making them financially worse off.
B)they need to work more to keep up with their neighbors.
C)interest rates will rise, causing a substitution effect.
D)higher spending today will lead to higher spending in the future, as well.
Q4) Define real shocks,define nominal shocks,and give an example of each.
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Page 12
Chapter 11: Keynesianism: the Macroeconomics of Wage and Price Rigidity
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Q1) In the efficiency wage model with the efficiency wage above the market-clearing wage,when employment is at its full-employment level
A)labor supply equals labor demand.
B)there is an excess supply of labor.
C)there is an excess demand for labor.
D)there could be either an excess demand for, or an excess supply of, labor.
Q2) If the menu cost theory is true,then firms that change prices less frequently than other firms are likely to be in
A)more competitive industries.
B)service, rather than manufacturing, industries.
C)growing, rather than declining, industries.
D)less competitive industries.
Q3) A model in which workers won't be concerned about the possibility of being fired if they don't work hard,because their wage is so low,is called
A)a cost-benefit model.
B)a job-stress model.
C)a gift-exchange model.
D)a shirking model.
Q4) Why might firms pay an efficiency wage rather than a market-clearing wage?
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Chapter 12: Unemployment and Inflation
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Q1) The Phillips curve is a negative empirical relationship between A)bond prices and interest rates.
B)unemployment and output.
C)inflation and the real interest rate.
D)unemployment and inflation.
Q2) Ball found that the disinflation of the early 1980s in the United States had a sacrifice ratio of about
A)0)
B)1)
C)2)
D)3)
Q3) Shoe leather costs are
A)the costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation.
B)the costs of changing prices, such as printing and mailing catalogues.
C)the costs of the redistribution of wealth between lenders and borrowers.
D)the costs associated with the confusion of prices as signals.
Q4) What are the pros and cons of using cold turkey disinflation compared to a policy of gradualism?
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Chapter 13: Exchange Rates, business Cycles, and
Macroeconomic Policy in the Open Economy
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Q1) According to the classical model,an increase in the American nominal money supply would cause the nominal exchange rate to ________ and the real exchange rate to ________.
A)depreciate; appreciate
B)appreciate; depreciate
C)depreciate; remain unchanged
D)appreciate; remain unchanged
Q2) Describe the effects of contractionary monetary policy by the domestic central bank on output,the real interest rate,and net exports in both the domestic and foreign country,using a Keynesian model in the short run.What happens in the long run? Show a diagram to illustrate the short- and long-run effects in both countries.
Q3) In an open economy,an increase in foreign output would cause the IS curve to shift ________ and a decrease in the foreign real interest rate would cause the IS curve to shift ________.
A)down; down
B)down; up
C)up; down
D)up; up
Q4) What is purchasing power parity? Why might it not hold?
Page 15
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Chapter 14: Monetary Policy and the Federal Reserve System
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Q1) Which of the following statements would Milton Friedman agree with concerning the conduct of monetary policy?
A)Information lags are short, enabling the central bank to respond quickly to changes in the economy.
B)There is little uncertainty over the effect of a change in the money supply on the economy.
C)There are long and variable lags between monetary policy actions and their economic results.
D)Wage and price adjustments are relatively slow, so changing the money supply will have a minimal impact on the real economy.
Q2) Many countries dropped their use of money-growth targets in the 1980s because A)they were in severe recessions.
B)political opponents claimed money-growth targeting helped the rich at the expense of the poor.
C)money demand became unstable.
D)it was too difficult to coordinate monetary policy with fiscal policy.
Q3) Was the money multiplier stable during the Great Recession? Why would an unstable money multiplier pose a problem for monetary policy?
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Chapter 15: Government Spending and Its Financing
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Q1) Real money demand in the economy is given by L = 0.5Y - 2500i, Where Y is real income and i is the nominal interest rate.In equilibrium,real money demand L equals real money supply M/P.Suppose that Y equals 1000 and the real interest rate is 0.02.What is the maximum amount of seignorage revenue?
A)11.11
B)20.25
C)22.25
D)24.75
Q2) The amount by which government purchases and transfers exceed tax revenues is known as the
A)primary surplus.
B)primary deficit.
C)primary current deficit.
D)government debt.
Q3) An example of an automatic stabilizer is
A)consumer spending.
B)inflation.
C)unemployment insurance.
D)discretionary fiscal policy.
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